Among the various sets of roles and duties of the management, one is to make certain representations during an audit engagement. These are termed as audit assertions. The main issues are dealt with in these assertions are questions regarding the presentation of the financial statements, the quantity or value of items contained in the statements and the basis of recognition of these items. In other words, they are also termed as Management Assertions. The assertions mentioned above are broken down into further details based on their existence, occurrence, completeness, etc (Trieu, 2017). These assertions are an aid to the auditor’s effort in analyzing the intricacies of several issues which he comes across in the process of verification of correctness and completeness of the financial statements.
Substantive Audit Procedures: These are detailed and elaborate audit procedure conducted by the auditor to gather sufficient audit evidence. Matters which are of great concern to the auditor are worked upon in these procedures and the methodologies are performed to collect intensive and conclusive information (Kim, et al., 2017). There are three categories in which substantive procedure can be bifurcated namely control testing, test of detail and analytical procedures. The nature of these substantive procedure or the timing and extent to which these procedures will be performed depends upon the degree of effectiveness and efficiency of the prevalent system of internal control of the organization (Das, 2017).
For Risks pertaining to Valuation: The management should provide the auditor with a list containing information on the inventory at hand and the auditor should try to match the list with the general ledger. The criteria of lower of cost price or net realizable value is to be met always. The source of getting the realizable value is market data (Jefferson, 2017). Observation by the auditor of physical count of inventory is very useful mean of gathering audit evidence. This activity needs to be repeated at least two times a year. Another possible way of collecting audit evidence related to valuation is sample testing of the pricing methodologies of the inventory. Closing stock is an area that should grab the most of attention of the auditor as it is more prone to misrepresentation as the management to its advantage can increase or decrease its valuation to alter operating results. Provisions that are made for goods in transit are to be scrutinized by the auditor, the methods and procedure for making those provisions should be considered (Grenier, 2017).
For Obligation and Rights: This risk to this assertion comes into the picture when third parties get involved in the transaction. The biggest source of audit evidence in these scenarios are the agreements between the parties involved in the transaction. An analysis of the wordings and phrases of the document will give clearer picture regarding transfer of title and obligations set out in the transactions. The terms of policy document pertaining to insurance will give an idea about the various stages of risk and its outcomes.
As per the provisions of ASA 701, the matters contained in the audit report that warrant the most amount of attention by the auditor are termed as key audit matters. Each matter that is categorized as key audit matter requires detailed description and analysis to be put out by the auditor. The matters to be put in this paragraph require separate headings and section within the report. The auditor should make sure of stating the fact that the decision to put certain matters as key matters within the report is based upon his professional judgement. Efforts should be made to put it forward the point that the opinion given by the auditor on the key matters are not in isolation but a part of the opinion of the entire audit report (Goldmann, 2016). This is basically a way to make an audit report more enhanced and detailed without making it too lengthy to read through. It has been observed that the users of the financial statements including the shareholders to whom the report is addressed as well as other stakeholders such as creditors, lenders, etc. want to know more about the matters regarding which there were detailed discussions between the auditor and the management and which are matters to which the auditors have devoted maximum amount of their attention. Not just these, but because of this detailed and enhanced reporting, a greater level of communication is harvested between the auditors and the people who have the governance responsibilities of the company.
Not all matters relating to valuation of inventory are to be key audit matter. It all depends on the degree of complexity involved. Matters like making provisions on the value of inventory typically involves the use of judgements and estimates by the management based on past and projected data. Therefore, this area requires sufficient appropriate audit evidence to be gathered to form a conclusion on the correctness of the approach. One hundred percent accuracy in these estimation is highly unlikely to be achieved.
If the auditor believes there are no such matters to be emphasized upon given the level of operations and types of activities performed or items contained in the financial statement, it might not put anything as key matter. However, a paragraph in the audit report still needs to be there describing such situation. The heading of the paragraph in that case would still be “key audit matters”.
A disclosure need =s to be made by the auditor describing the methods adopted to collect audit evidence regarding these matters. The observations that have been during the audit also need to be mentioned and how those observations have been dealt with in forming the overall audit opinion also needs to be described (Erik & Jan, 2017).
If we go by the study put forward by American Intellectual Property Law Association only twenty percent of an entity’s assets were intangibles. The remaining all were tangible assets. That figure of twenty percent has catapulted to seventy five percent in modern times. The might of technology growth may be given credit to these vastly changed scenarios.
Valuation: There is no blanket method of valuation of intellectual property. It varies from company to company and is generally based on the level of criticality each enterprise has towards to these properties. An intellectual property that is under the umbrella of a copyright, patent or trademark has less complex valuations compared to those of technical know-how or list of customers, etc. As most of them seem to be useful in equal terms, allocating a value to them becomes difficult as they cannot be linked directly to the earning that is being generated by them (Alexander, 2016).
Obligation and Rights: Ownership or title issue are a burning top in this field. Trademarks generally sees less legal battles but patents and copyrights are among those that have the most number of lawsuits related to them. Therefore, it is common to see this item lying the contingent asset or liability section of the annual report. Until and unless the ownership is established by a court of law they can’t be put into a balance sheet.
Substantive audit procedure: In the first step, we collect data about the asset’s nature. Any regulation that is specific to the asset class also needs to be understood. Documents related to the title also need to be understood that the questions regarding ownership is clear in the minds of the auditor. For those assets that are not purchased., developed through in house research needs to be paid attention to (Arnott, et al., 2017). It should be checked whether the research and development expenditure have been properly accounted for. One to one conversation with employees, collecting information through questionnaire for staff using the asset are also effective means for collecting audit evidence. Any contracts or arrangements with the government as well the sanctioning authority of the patents should be considered through the available documents. There should be permissible level of non-conformities set.
Any matter that calls for greater attention by the auditor falls under Key audit matters as per ASA 701. For these matters detailed and thorough information needs to be given by the auditor in his report using separate headings and sections within the report. That the matters have been selected on purely based on professional judgement must be clearly stated and that the opinion given on such matters is not in isolation and is part of the opinion on the entire set of financials, must also be stated. The investors and the other stakeholders of the entity have increasingly shown interest in knowing about the matters which had the most amount of attention of the auditors and for which there were detailed explanations were provided by the management to the auditors. This practice also enhances the level of interaction between the auditors and the people who have the responsibilities of governance of the enterprise (Belton, 2017).
Depending on the level of complexity involved in determining certain aspects of valuation of intellectual property, it may or may not be put under key audit matters. For the purposes of provision, a host of estimates and approximations are made by the management to come to a value to be assigned to the asset. In such scenarios, it is the responsibility of the auditor to gather sufficient appropriate audit evidence to form an opinion (Choy, 2018). The question in here is not arithmetical accuracy as it cannot be realistically achieved. It is more about the reasonableness of the value chosen.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations. Decision Support Systems, Volume 97, pp. 58-68.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Erik, H. & Jan, B., 2017. Supply chain management and activity-based costing: Current status and directions for the future. International Journal of Physical Distribution & Logistics Management, 47(8), pp. 712-735.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), pp. 241-256.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.
Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality & Tourism Administration, , 18(1), pp. 23-40.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.
Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
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